The Strategic Planning Process: A Brief Overview

The term strategic management underlines the importance of managers with regard to
strategy. Strategies do not happen just by themselves. Strategy involves people,
especially the managers who decide and implement strategy

It is important to keep in mind that strategies are often developed through formal planning
processes.
But sometimes the strategies an organisation actually pursues are emergent– in Other
words, accumulated patterns of ad hoc decisions and rapid responses to the
unanticipated.

Understand the The strategic position is concerned with the impact on strategy of
strategic the external environment, an organisation’s strategic capability
position (resources and competences), the expectations and influence of
stakeholders and culture

The environment: The organisation exists in the context of a

complex political, economic, social, technological, environmental (i.e.
green) and legal world. This environment changes and is more complex
for some organisations than for others

Many of those variables will give rise to opportunities and others will
exert threats on the organisation –
or both.

THE SBL syllabus provides key frameworks to help in focusing on

priority issues in the face of environmental complexity and changes.

Strategic capability: The strategic capability of the organisation – made

up of resources(e.g. machines and buildings) and competences(e.g.
technical and managerial skills). One way of thinking about the strategic
capability of an organization is to consider its strengths and
weaknesses (for example, where it is at a competitive advantage or
disadvantage). The aim is to form a view of the internal influences – and
constraints – on strategic choices for the future. It is usually a
combination of resources and high levels of competence in particular
activities (as core competences) that provide advantages which competitors
find difficult to social responsibility and ethics.
copy.
These positioning issues were all important for Yahoo! as it faced its
The SBL crisis in 2006. The external environment offered the threat of growing
syllabus competition from Google. Its strong Internet brand and existing audience
provides tools were key resources for defending its position. The company was
and concepts
for analysing struggling with its purposes, with top management apparently indecisive.
such The company none the less had inherited a strong culture, powerful
capabilities. enough to make Brad Garlinghouse shave a Y on his head and believe
that his blood bled in the corporate colours of his employer
Expectations
and influence Culture . Organisational cultures can also influence strategy. So can the
of cultures of a particular industry or particular country. These cultures
stakeholders: are typically a product of an organisation’s history.
the SBL
syllabus The consequence of history and culture can be strategic drift; a failure
explores the to create Necessary change.
major influences
of stakeholder
expectations on
an
organisation’s
purposes. Here
the issue of
corporate
governance is
important:
who should the
organisation
primarily serve
and how
should
managers be
held
responsible for
this? This
raises issues
of corporate
Manage Strategy Once a strategy is developed, the organisation needs to organise
in action for successful implementation.

Organizing for success: Each strategy requires its own specific

configuration of structures and
systems
The fundamental question, therefore, is: what kinds of structures and
systems are required for the chosen strategy?
SBL introduces a range of structures and systems and provides
frameworks for deciding between them.
According to Brad Garlinghouse, s matrix organisation and
bureaucracy were all big problems for Yahoo!.
Managing strategic change: Managing strategy very often involves
strategic change, and We will need to look at the various issues
involved in managing change. This will include the need to
understand how the context of an organisation should influence the
approach to change and the different types of roles for people in
managing change. It also looks at the styles that can be adopted
for managing change and the levers by which change can be
effected.

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Fourteen fundamental questions in strategy

Strategic position Strategic choices Strategy in action
 What are the  How should business units  Are strategies suitable,
environmental compete? acceptable and feasible?
opportunities and  Which businesses to include  What kind of strategy-
threats? in a portfolio? making process is
 What are the  Where should the needed?
organisation's organisation compete
 What are the required
strengths and internationally?
organisation structures
weaknesses?  Is the organisation and systems?
 innovating appropriately?
What is the basic  How should the
purpose of the  Should the organisation manage
organisation? organisation buy
necessary changes?
 Howdoes other companies, ally or go
 Who should do what in the
it alone? strategy
culture fit
the strategy? process?
 Strategic Analysis

The environment is what gives organisations their means of survival. It creates

opportunities and it presents threats. Business needs to respond to threats and take advantage
of opportunities-so changes in marco environment can act as drivers for change.

Although the future can never be predicted perfectly, it is clearly important that
entrepreneurs and managers try to analyse their environments as carefully as they can
in order to anticipate and – if possible – influence environmental change.

Macro Environment: board factors which could affect all businesses-PESTLE

The macro-environment is the highest-level layer. This consists of broad environmental
factors that impact to a greater or lesser extent on almost all organisations. Here, the
PESTEL framework can be used to identify how future issues in the political, economic,
social, technological, ecological and legal environments might affect organisations. This PESTEL
analysis provides the broad ‘data’ from which to identify key drivers of change. These key
drivers can be used to construct scenarios of alternative possible futures.

Micro environment: factors which affect the org’s ability to operate effectively in its own
industry/ market sector. Porter’s 5 Forces.

Industry, or sector, forms the next layer within this broad general environment. This is made
up of organisations producing the same sorts of products or services. Here the five forces
framework is particularly useful in understanding the attractiveness of particular
industries or sectors and potential threats from outside the present set of competitors.

Competitors and markets are the most immediate layer surrounding organisations. Here
the concept of strategic groups can help identify different kinds of competitors. Similarly,
in the marketplace, customers’ expectations are not all the same, which can be understood
through the concept of market segments.
Organizations need to avoid strategic drift. Strategic Drift usually occurs when organizations
are unable to keep pace with the changes that happen in their immediate environment
which in turn leads to their slow and gradual demise. Strategic drift usually arises from
a combination of factors, including:
- Business failing to adapt to a changing external environment (for example social or
technological change)
- A discovery that what worked before (in terms of competitiveness) doesn’t work anymore
- Complacency sets in – often built on previous success which management assume
will continue
- Senior management deny there is a problem, even when faced with the evidence

Macro Environment: PESTEL Analysis

The other framework, which should be applied when surveying the external environment,
is PESTEL factors:
 Political
 Economic
 Social
 Technological
 Environmental/ Ecological
 Legal
Again all of these factors will not necessarily apply but provide a useful checklist against
which you can compare in an exam situation. They are explained more fully below:

Political environment
The organisation must react to the attitude of the political party that is in power at the
time. The government is the nation’s largest supplier, employer, customer and investor and
any change in government spending priorities can have a significant impact on a
business, eg the defence industry.
Political influence will include legislation on trading, pricing, dividends, tax, employment,
as well as health and safety.

Economic environment
It refers to macro-economic factors such as exchange rates, business cycles and
differential economic growth rates around the world. It is important for a business to
understand how its markets are affected by the prosperity of the economy as a whole.
Other economic influences include:
 Taxation levels.
 Inflation rate.
 The balance of trade and exchange rates.
 The level of unemployment
 Interest rates and availability of credit.
 Government subsidies.

One should also look at international economic issues, which could include:
 The extent of protectionist measures.
 Comparative rates of growth, inflation, wages and taxation.
 The freedom of capital movement.
 Economic agreements.
 Relative exchange rates.

The social environment (affects workforce and consumers)

Social influences include changing cultures and demographics. Thus, for example, the
ageing populations in many Western societies create opportunities and threats for both
private and public sectors.
 Changing values and lifestyles.
 Changing values and beliefs.
 Changing patterns of work and leisure.
 Demographic changes.
 Changing mix in the ethnic and religious background of the population.

The technological influences

This is an area in which change takes place very rapidly and the organisations need to
be constantly aware of what is going on. Technological change can influence the
following:
 Changes in production techniques.
 The type of products that are made and sold.
 How services are provided.
 How we identify markets.
Environmental/Ecological
Ecological stands specifically for ‘green’ environmental issues, such as pollution, waste and
climate change. Environmental regulations can impose additional costs, for example with
pollution controls, but they can also be a source of opportunity, for example the new
businesses that emerged around mobile phone recycling.

Legal environment
How an organisation does business:
 Law of contract, law on unfair selling practices, health and safety legislation.
 How an organisation treats its employees, employment laws.
 How an organisation gives information about its performance.
 Legislation on competitive behaviour.
 Environmental legislation.
As can be imagined, analysing these factors and their interrelationships can produce
long and complex lists. Rather than getting overwhelmed by a multitude of details, it is
necessary to step back eventually to identify the key drivers for change. Key drivers for
change are the environmental factors likely to have a high impact on the future success
or failure of strategy. Typical key drivers will vary by industry or sector. Thus a retailer
may be primarily concerned with social changes driving customer tastes and behaviour, for
example forces encouraging outof-town shopping, and economic changes, for example
rates of economic growth and employment.

Public-sector managers are likely to be especially concerned with social change (e.g. rising
youth unemployment), political change (e.g. changing government priorities) and
legislative change (new training requirements).

Building scenarios
When the business environment has high levels of uncertainty arising from either
complexity or rapid change (or both), it is impossible to develop a single view of how
environmental influences might affect an organisation’s strategies – indeed it would be dangerous
to do so. Scenario analyses are carried out to allow for different possibilities and help
prevent managers from closing their minds to alternatives. Thus scenarios offer
plausible alternative views of how the business environment might develop in the
future.

Scenarios typically build on PESTEL analyses and key drivers for change, but do not offer a
single forecast of how the environment will change. The point is not to predict, but to
encourage managers to be alert to a range of possible futures. Effective scenario-
building can help build strategies that are robust in the face of environmental change.

While there are many ways to carry out scenario analyses, five basic steps are often
followed:

Defining scenario scope is an important fi st step. Scope refers to the subject of the
scenario analysis and the time span. For example, scenario analyses can be carried out
for a whole industry globally, or for particular geographical regions and markets. While
businesses typically produce scenarios for industries or markets, governments often
conduct scenario analyses for countries, regions or sectors (such as the future of
healthcare or higher education). Scenario time spans can range from a decade or so or for
just three to five years ahead. The appropriate time span is determined partly by the
expected life of investments. In the energy business, where oil fields, for example,
might have a life span of several decades, scenarios often cover 20 years or more.

Identifying the key drivers for change comes next. Here PESTEL analysis can be used to
uncover issues likely to have a major impact upon the future of the industry, region or
market. In the fashion industry, key drivers range from demographics to technology. In
the oil industry, for example, political stability in the oil-producing regions is one major
uncertainty; another is the capacity to develop major new oil f elds thanks to new
extraction technologies. These could be selected as key drivers for scenario analysis
because both are uncertain and regional stability is not closely correlated with
technological advance.

Developing scenario ‘stories’: as in films, scenarios are basically stories. Having selected
opposing key drivers for change, it is necessary to knit together plausible stories that
incorporate both key drivers and other factors into a coherent whole.

Identifying impacts of alternative scenarios on organisations is the next key stage of

scenario building.

Establishing early warning systems: once the various scenarios are drawn up, organisations
should identify indicators that might give early warning about the final direction of
environmentalchange, and at the same time set up systems to monitor these. Effective
monitoring of well-chosen indicators should facilitate prompt and appropriate
responses.
 Micro/Industry/Sector analysis

An industry is a group of firms producing products and services that are essentially the
same.

Examples are the automobile industry and the airline industry. Industries are also often described as
‘sectors’, especially in public services (e.g. the health sector or the education sector).
Industries and sectors are often made up of several specific markets.

A market is a group of customers for specific products or services that are

essentially the same (e.g. A particular geographical market). Thus the automobile
industry has markets in North America, Europe and Asia, for example.

Competitive forces – the Five Forces Framework

Porter’s 5 forces model: Analyse the attractiveness and profitability of an industry or market
segment. The application of Porter’s five
forces model will increase management understanding of an industrial environment
which they may want to enter.

Industries vary widely in terms of their attractiveness, as measured by how easy it is for
participating fi rms to earn high profits. One key determinant of profitability is the extent
of competition, actual or potential. Where competition is low, and there is little threat of
new competitors, participating firms should normally expect good profits.

The framework helps identify the attractiveness of an industry in terms of five

competitive forces. His essential message is that where the five forces are high, industries
are not attractive to compete in. Excessive competitive rivalry, powerful buyers and
suppliers and the threat of substitutes or new entrants will all combine to squeeze
profitability.

Although initially developed with businesses in mind, the five forces framework is
relevant to most organisations. It can provide a useful starting point for strategic
analysis even where profit criteria may not apply. In the public sector, it is important to
understand how powerful suppliers can push up costs; among charities, it is important
to avoid excessive rivalry within the same market.

The model has similarities with other tools for environmental audit, such as political,
economic, social, and technological (PEST) analysis, but should be used at the level of
the strategic business unit, rather than the organisation as a whole. A strategic
business unit (SBU) is a part of an organisation for which there is a distinct external
market for goods or services. SBUs are diverse in their operations and markets so the
impact of competitive forces may be different for each one.

Porter says that five forces together determine the long-term profit potential of an
industry

Threat of How easy it is to enter the industry influences the degree of

new competition. The greater the threat of entry, the worse it is for
entrants incumbents in an industry. An attractive industry has high barriers to
entry in order to reduce the threat of new competitors. Barriers to
entry are the factors that need to be overcome by new entrants if they
are to compete in an industry.

Five important entry barriers are:

- Economies of scale and experience
- Access to supply or distribution channels
- Expected retaliation through price war for example
- Legislation or government action. Legal restraints on new entry
vary from patent protection (e.g. pharmaceuticals), to regulation of
markets (e.g. pension selling), through to direct government action
(e.g. tariffs).
- Differentiation. Differentiation means providing a product or
service with higher perceived value than the competition. Cars are
differentiated, for example, by quality and branding. Steel, by contrast,
is by and large a commodity, undifferentiated and therefore sold by
the tonne. Steel buyers will simply
buy the cheapest. Differentiation reduces the threat of entry because
of increasing customer loyalty.
Power of Suppliers are those who supply the organisation with what it needs to
suppliers produce the product or service. As well as fuel, raw materials and
equipment, this can include labour and sources of finance. The
factors increasing supplier power are the converse to those for buyer
power. Thus supplier power is likely to be high where there are:

 Concentrated suppliers. Where just a few producers dominate

supply, suppliers have more power over buyers. The iron ore
industry is now concentrated in the hands of three main producers,
leaving the steel companies, still relatively fragmented, in a weak
negotiating position for this essential raw material.
 High switching costs. If it is expensive or disruptive to move from
one supplier to another, then the buyer becomes relatively
dependent and correspondingly weak. Microsoft is a powerful
supplier because of the high switching costs of moving from one
operating system to another.

Buyers are prepared to pay a premium to avoid the trouble, and

Microsoft Knows it.

 Supplier competition threat. Suppliers have increased power where

they are able to cut out buyers who are acting as intermediaries.
Thus airlines have been able to negotiate tough contracts with travel
agencies as the rise of online booking has allowed them to create
a direct route to customers. This is
called forward vertical integration, moving up closer to the ultimate
customer.
Power of Buyers are the organisation’s immediate customers, not necessarily the ultimate
buyers consumers. If buyers are
powerful, then they can demand cheap prices or product or service
improvements liable to reduce profits.

Buyer power is likely to be high when some of the following three

conditions prevail:
- Concentrated buyers. Where a few large customers account for the
majority of sales, buyer power is increased. This is the case on
items such as milk in the grocery sector in many European
countries, where just a few retailers dominate the market.
- Low switching costs. Where buyers can easily switch between one
 supplier and another, they have a strong negotiating position and
can squeeze suppliers who are desperate for their business.
Switching costs are typically low for weakly differentiated
commodities such as steel.
- Buyer competition threat. If the buyer has the capability to supply
itself, or if it has the possibility of acquiring such a capability, it
tends to be powerful. In negotiation with its suppliers, it can raise
the threat of doing the suppliers’ job themselves. This is called backward
vertical integration, moving back to sources of supply, and might occur
if satisfactory prices or quality from suppliers cannot be obtained. For
example, some steel companies have gained power over their iron
ore suppliers as they have acquired iron ore sources for
themselves.

It is very important that buyers are distinguished from ultimate consumers.

Thus for companies like Procter & Gamble or Unilever (makers of
shampoo, washing powders and so on), their buyers are retailers such as
Carrefour or Tesco, not ordinary consumers. Carrefour and Tesco have
much more negotiating power than an ordinary consumer would have. The
high buying power of such supermarkets is a strategic issue for the
companies supplying them.
Threat of Substitutes are products or services that offer a similar benefit to an
substitutes industry’s products or services, but have a different nature. For
example, aluminium is a substitute for steel; a tablet computer is a
substitute for a laptop; charities can be substitutes for public services.
Managers often focus on their competitors in their own industry, and
neglect the threat posed by substitutes.

Substitutes can reduce demand for a particular type of product as

customers switch to
 Alternatives – even to the extent that this type of product or service
becomes obsolete. However, there does not have to be much actual
switching for the substitute threat to have an effect.

The simple risk of substitution puts a cap on the prices that can be
charged in an industry.

Thus, although Eurostar has no direct competitors in terms of train

services from Paris to London, the prices it can charge are ultimately
limited by the cost of flights between the two cities.
Competition At the centre of five forces analysis is the rivalry between the existing
and rivalry players – ‘incumbents’ in an industry. The more competitive rivalry there
is, the worse it is for incumbents. Competitive rivals are organisations
with similar products and services aimed at the same customer group
(i.e. not substitutes). In the European airline industry, Air France and
British Airways are rivals; high-speed trains are a ‘substitute’
Five factors tend to define the extent of rivalry in an industry or
market:

 Competitor balance. Where competitors are of roughly equal size

there is the danger of intensely rivalrous behaviour as one
competitor attempts to gain dominance over others, through
aggressive price cuts for example. Conversely, less rivalrous
industries tend to have one or two dominant organisations, with the
smaller players reluctant to challenge the larger ones directly (e.g. by
focusing on niches to avoid the ‘attention’ of the dominant companies).

Industry growth rate. In situations of strong growth, an

organisation can grow with the market, but in situations
of low growth or decline, any growth is likely to be at the
Expense of a rival, and meet with fi erce resistance. Low-growth
markets are therefore often associated with price competition and low
profitability. The industry life cycle influences growth rates, and hence
competitive conditions

High fixed costs. Industries with high fixed costs, perhaps because they
require high investments in capital equipment or initial research, tend to
be highly rivalrous. Companies will seek to spread their costs (i.e.
reduce unit costs) by increasing their volumes: to do so, they typically
 cut their prices, prompting competitors to do the same and thereby
triggering price wars in which everyone in the industry suffers.
Similarly, if extra capacity can only be added in large increments (as
in many manufacturing sectors, for example a chemical or glass
factory), the competitor making such an addition is likely to create short-
term over-capacity in the industry, leading to increased competition to
use capacity.

High exit barriers. The existence of high barriers to exit – in other

words, closure or disinvestment
– Tends to increase rivalry, especially in declining industries. Excess
capacity persists And consequently incumbents fight to maintain
market share. Exit barriers might be high for a variety of reasons:
for example, high redundancy costs or high investment in specific
assets such as plant and equipment which others would not buy.

 Low differentiation. In a commodity market, where products or

services are poorly differentiated,
rivalry is increased because there is little to stop customers
switching between competitors and the only way to compete is on
price.

In some industries, complementors can also be considered; they enhance your business’
attractiveness to customers or suppliers. For
example, app developers are complementors to smartphones as these apps make the
device more useful.
 Industry life cycle
The structure of the industry affects the rules of competition, and thus the necessary strategy for
survival and development. Changes in industrial structure, demand and technology requirements
through the industry life cycle have important implications for sources of competitive advantage in
every phase.
Industries experience a similar cycle of life. Just as a person is born, grows, matures, and

eventually experiences decline and ultimately death, so too do industries and product lines. The

stages are the same for all industries, yet every industry will experience these stages differently,

they will last longer for some and pass quickly for others. Even within the same industry, various

firms may be at different life cycle stages. A firms strategic plan is likely to be greatly influenced by

the stage in the life cycle at which the firm finds itself. Some companies or even industries find new

uses for declining products, thus extending their life cycle.

The growth of an industry's sales over time is used to chart the life cycle. The distinct stages of an

industry life cycle are: introduction, growth, maturity, and decline. Sales typically begin slowly at

the introduction phase, then take off rapidly during the growth phase. After leveling out at maturity,

sales then begin a gradual decline. In contrast, profits generally continue to increase throughout the

life cycle, as companies in an industry take advantage of expertise and economies of scale and

scope to reduce unit costs over time.

The power of the five forces typically varies with the stages of the industry life cycle.
The industry life-cycle concept proposes that industries start small in their development
stage, then go through a period of rapid growth (the equivalent to ‘adolescence’ in the human
life cycle), culminating in a period of ‘shake-out’. The final two stages are first a period of slow or
even zero growth (‘maturity’), and then the final stage of decline (‘old age’). Each of these
stages has implications for the five forces.
 The development stage is an experimental one, typically with few players, little direct
rivalry and highly differentiated products. The five forces are likely to be weak,
therefore, though profits may actually be scarce because of high investment
requirements.
In the introduction stage of the life cycle, an industry is in its infancy. Perhaps a new, unique

product offering has been developed and patented, thus beginning a new industry. Some analysts

even add an embryonic stage before introduction. At the introduction stage, the firm may be alone

in the industry. It may be a small entrepreneurial company or a proven company which used

research and development funds and expertise to develop something new. Marketing refers to new

product offerings in a new industry as "question marks" because the success of the product and the

life of the industry is unproven and unknown.

A firm will use a focused strategy at this stage to stress the uniqueness of the new product or service

to a small group of customers. These customers are typically referred to in the marketing literature

as the "innovators" and "early adopters." Marketing tactics during this stage are intended to explain

the product and its uses to consumers and thus create awareness for the product and the industry.
According to research by Hitt, Ireland, and Hoskisson, firms establish a niche for dominance within

an industry during this phase. For example, they often attempt to establish early perceptions of

product quality, technological superiority, or advantageous relationships with vendors within the

supply chain to develop a competitive advantage.

Because it costs money to create a new product offering, develop and test prototypes, and market

the product, the firm's and the industry's profits are usually negative at this stage. Any profits

generated are typically reinvested into the company to solidify its position and help fund continued

growth. Introduction requires a significant cash outlay to continue to promote and differentiate the

offering and expand the production flow from a job shop to possibly a batch flow. Market demand

will grow from the introduction, and as the life cycle curve experiences growth at an increasing rate,

the industry is said to be entering the growth stage. Firms may also cluster together in close

proximity during the early stages of the industry life cycle to have access to key materials or

technological expertise, as in the case of the U.S. Silicon Valley computer chip manufacturers.

The next stage is one of high growth, with rivalry low as there is plenty of market
opportunity for everybody. Low rivalry and keen buyers of the new product favour
profits at this stage, but these are not certain. Barriers to entry may still be low in the
growth stage, as existing competitors have not built up much scale, experience or
customer loyalty. Suppliers can be powerful too if there is a shortage of components or
materials that fast-growing businesses need for expansion.
Like the introduction stage, the growth stage also requires a significant amount of capital. The goal

of marketing efforts at this stage is to differentiate a firm's offerings from other competitors within

the industry. Thus the growth stage requires funds to launch a newly focused marketing campaign

as well as funds for continued investment in property, plant, and equipment to facilitate the

growth required by the market demands. However, the industry is experiencing more product
standardization at this stage, which may encourage economies of scale and facilitate development

of a line-flow layout for production efficiency.

Research and development funds will be needed to make changes to the product or services to

better reflect customers' needs and suggestions. In this stage, if the firm is successful in the

market, growing demand will create sales growth. Earnings and accompanying assets will also

grow and profits will be positive for the firms. Marketing often refers to products at the growth

stage as "stars." These products have high growth and market share. The key issue in this stage is

market rivalry. Because there is industry-wide acceptance of the product, more new entrants join

the industry and more intense competition results.

The duration of the growth stage, as all the other stages, depends on the particular industry or

product line under study. Some items—like fad clothing, for example—may experience a very

short growth stage and move almost immediately into the next stages of maturity and decline. A

hot toy this holiday season may be nonexistent or relegated to the back shelves of a deep-

discounter the following year. Because many new product introductions fail, the growth stage may

be short or nonexistent for some products. However, for other products the growth stage may be

longer due to frequent product upgrades and enhancements that forestall movement into

maturity. The computer industry today is an example of an industry with a long growth stage due

to upgrades in hardware, services, and add-on products and features.

During the growth stage, the life cycle curve is very steep, indicating fast growth. Firms tend to

spread out geographically during this stage of the life cycle and continue to disperse during the

maturity and decline stages. As an example, the automobile industry in the United States was
initially concentrated in the Detroit area and surrounding cities. Today, as the industry has

matured, automobile manufacturers are spread throughout the country and internationally.

The shake-out stage begins as the market becomes increasingly saturated and cluttered
with competitors. Profits are variable, as increased rivalry forces the weakest
competitors out of the business.

In the maturity stage, barriers to entry tend to increase, as control over distribution is
established and economies of scale and experience curve benefits come into play.
Products or services tend to standardise, with relative price becoming key. Buyers may
become more powerful as they become less avid for the industry’s products and more confident
in switching between suppliers. Profitability at the maturity stage relies on high market share,
providing leverage against buyers and competitive advantage in terms of cost.
As the industry approaches maturity, the industry life cycle curve becomes noticeably flatter,

indicating slowing growth. Some experts have labeled an additional stage, called expansion,

between growth and maturity. While sales are expanding and earnings are growing from these "cash

cow" products, the rate has slowed from the growth stage. In fact, the rate of sales expansion is

typically equal to the growth rate of the economy.

Some competition from late entrants will be apparent, and these new entrants will try to steal market

share from existing products. Thus, the marketing effort must remain strong and must stress the

unique features of the product or the firm to continue to differentiate a firm's offerings from

industry competitors. Firms may compete on quality to separate their product from other lower-cost

offerings, or conversely the firm may try a low-cost/low-price strategy to increase the volume of

sales and make profits from inventory turnover. A firm at this stage may have excess cash to pay

dividends to shareholders. But in mature industries, there are usually fewer firms, and those that

survive will be larger and more dominant. While innovations continue they are not as radical as
before and may be only a change in color or formulation to stress "new" or "improved" to

consumers. Laundry detergents are examples of mature products.

Finally, the decline stage can be a period of extreme rivalry, especially where there are high
exit barriers, as falling sales force remaining competitors into dog-eat-dog competition.
However, survivors in the decline stage may still be profitable if competitor exit leaves
them in a monopolistic position

Declines are almost inevitable in an industry. If product innovation has not kept pace with
other competing products and/or service, or if new innovations or technological changes
have caused the industry to become obsolete, sales suffer and the life cycle experiences a
decline. In this phase, sales are decreasing at an accelerating rate. This is often
accompanied by another, larger shake-out in the industry as competitors who did not leave
during the maturity stage now exit the industry. Yet some firms will remain to compete in
the smaller market. Mergers and consolidations will also be the norm as firms try other
strategies to continue to be competitive or grow through acquisition and/or diversification.
 Market segments
Market Segmentation Strategy
The logic of market segmentation is quite simple: it is based on the idea that a single product item does not
usually appeal to all consumers. For this reason, marketing strategies typically focus their marketing effort on
specific groups of consumer rather than on the whole population.

Marketing segmentation is the process of dividing a market into groups of similar consumer and selecting the
most appropriate groups(s) for the organization to serve. Market are selected on the basis of their size, their
profit potential, and how well they can be defined and served by the organization.

Business Segmentation Approaches

Unable to compete broadly against entrenched competitors, threshold companies and those entering markets
new to them have repeatedly adopted market segmentation approach.

The identification and selection of market segments is the most important strategic decision facing the
industrial firm. The choice of which market segments to pursue is they key starting block for developing
successful overall strategies and product/market plans. How an industrial producer defines a market segment
determines the boundaries of the business it is in.

The selection of an industrial segment(s) to concentrate on will significantly affect all of the functional areas of
the firm. As Cory states:

All else follows. Choice of market is a choice of the customer and of the competitive, technical, political and
social environments in which one elects to compete. It is no an easily reversed decision; having made the
choice the company develops skills and resources around the markets it has elected to serve. It builds a set of
relationships with customers that are at once a major source of strength and a major commitment.

The commitment carries with it the responsibility to serve customers well, to stay in the technical and product-
development race, and to grow in pace with growing market demand. Such choices are not made in a vacuum.
They are influenced by the company's background; by its marketing, manufacturing, and technical strengths;
by the fabric of its relations with existing customers, the scientific community, and competitors (E. Raymond
Cory).

Examples of basis of market segmentation

A market segment is a group of customers who have similar needs that are different from customer needs in other parts of the
market. Where these customer groups are relatively small, such market segments are often called ‘niches’. Dominance of a market segment
or niche can be very valuable.

For long-term success, strategies based on market segments must keep customer needs firmly in

mind. Two issues are particularly important in market segment analysis, therefore:
1. Variation in customer needs. Focusing on customer needs that are highly distinctive from those typical in the market is
one
means of building a long-term segment strategy. Customer needs vary for a whole variety of reasons; any of these factors
could be used to identify distinct market segments. However, the crucial bases of segmentation vary according to market. In
industrial markets, segmentation is often thought of in terms of industrial classificationof buyers: steel producers might
segment by automobile industry, packaging industry and construction industry, for example. On the other hand,
segmentation by buyer behaviour (e.g. direct buying versus those users who buy through third parties such as contractors)
or purchase value (e.g. high- value bulk purchasers versus frequent low-value purchasers) might be more appropriate.
Being able to serve a highly distinctive segment that other organisations find difficult to serve is often the basis for a
secure long-term strategy.
2. Specialisation within a market segment can also be an important basis for a successful segmentation strategy. This is
sometimes called a ‘niche strategy’. Organisations that have built up most experience in servicing a particular market segment
should not only have lower costs in so doing, but also have built relationships which may be difficult for others to break
down. Experience and relationships are likely to protect a dominant position in a particular segment. However, precisely
because customers value different things in different segments, specialised producers may find it very difficult to compete
on a broader basis. For example, a small local brewery competing against the big brands on the basis of its ability to satisfy
distinctive local tastes is unlikely to find it easy to serve other segments where tastes are different, scale requirements
are larger and distribution channels are more complex.
 Critical success factors
Critical success factors are a limited number of key variables or conditions that have a tremendous impact on
how successfully and effectively an organization meets its mission or the strategic goals or objectives of a
program or project.
Critical success factors (CSFs) are often quoted in management literature as those areas in which an organisation needs to
perform best if it is to achieve overall success. CSFs have frequently been used to help determine the requirements for
executive information systems (EIS), supporting the ‘key indicator’ approach to management control. A number of methods
have been developed to identify these key indicators, and the CSF approach is one of the most widely used, which should be
measured and monitored using EIS to help manage the strategic direction of an organisation.

A strategy canvas compares competitors according to their performance on key success factors in order to establish the
extent of differentiation.
Critical success factors (CSFs) define key areas of performance that are essential for an organization to
accomplish its mission, whether that mission is to implement new software, complete a project or define an
organizational mission statement. When correctly targeted, CSFs allow stakeholders to track the success of
the mission. They vary based on the type of project, industry, product and overall business model or strategy
under which the project operates.
 Software Implementations
Implementing a new software application can be a costly and resource-intensive proposition. A strategy for the
implementation should be clearly defined, with the metrics to measure success concisely documented and measured before
and throughout the project. Some common CSFs in strategic software implementation can include metrics regarding end
user support, training and software uptime. CSFs should also measure criteria specific to the type of software. For example,
if implementing a new accounting program, measure if the program is fulfilling business requirements. If the program should
reduce the amount of time to record accounts receivable, then a CSF would be time invested in that specific activity.

Mission Statements
A business must perform well in key areas that differentiate it from competitors to achieve its mission. These key areas are
unique to the organization and the industry in which it competes. For example, if a company's mission is to serve fresh,
organic orange juice, then CSFs would include measurements on the amount of preservatives needed, times to get juice
from the farm into the hands of customers or tracking of the use of pesticides.

CSFs are those factors that either are particularly valued by customers (i.e. strategic customers) or provide a significant
advantage in terms of cost. Critical success factors are therefore likely to be an important source of competitive advantage
or disadvantage.

For example, critical success factors in the electrical components market coild include cost, after-sales service, delivery
reliability, technical quality, testing facilities, design advisory services etc.

National Environment
( assess threats and opportunities in different countries)-Porter’s Diamond
It is a model that is designed to help understand the competitive advantage nations or groups possess due to certain factors
available to them. The tool is often used to analyse the external competitive environment or marketplace, which helps
companies to determine the relative strength and explain why certain industries have become competitive or possess
regional advantages.

 Porter's Diamond model explains the factors that can drive competitive advantage for one national market or
economy over another.
 It can be used both to describe the sources of a nation's competitive advantage and the path to obtaining
such an advantage.
 The model can also be used by businesses to help guide and shape strategy regarding how to approach
investing and operating in different national markets.

In this model, the regional advantages can be assessed by four factors, which includes:
1. Factor conditions
2. Firm strategy, structure and rivalry
3. Demand conditions
4. Related and supporting industries.

Government policy: Government policy on investing in infrastructure, and higher education along with tax regime and
government’s
attitude to foreign investors etc. could also affect a company’s decision to invest in a country.

What do the four factors mean?

 Factor conditions (country’s resources/supply side factors):
Basic pre-conditions needed for an industry to be successful but cannot give a sustainable competitive advantage by
themselves (natural resources, climate, semi-skilled or unskilled labour.

Advanced factors: Can help to promote competitive advantage (infrastructure and communications, higher education,
skilled employees like engineers to support hi-tech industries)
The final determinant, and the most important one according to Porter's theory, is that of
factor conditions. Factor conditions are those elements that Porter believes a
country's economy can create for itself, such as a large pool of skilled labor, technological
innovation, infrastructure, and capital.
For example, Japan has developed a competitive global economic presence beyond the country's inherent
resources, in part by producing a very high number of engineers that have helped drive technological innovation by
Japanese industries.

Porter argues that the elements of factor conditions are more important in determining a country's competitive
advantage than naturally inherited factors such as land and natural resources. He further suggests that a primary
role of government in driving a nation's economy is to encourage and challenge businesses within the country to
focus on the creation and development of the elements of factor conditions. One way for the government to
accomplish that goal is to stimulate competition between domestic companies by establishing and enforcing anti-
trust laws.

Demand Conditions
A country with sophisticated homebuyers that have awareness and demand for advanced, quality, and innovative products can
create international competitiveness. The experience a business gains from meeti ng domestic customers’ needs will allow it to
compete successfully on an international scale
Demand conditions refer to the size and nature of the customer base for products, which also drives innovation
and product improvement. Larger, more dynamic consumer markets will demand and stimulate a need to
differentiate and innovate, as well as simply greater market scale for businesses.

Related and Supporting Industries

Industries need to be supported by a good local supply chain which contributes to quality and cost advantages. For example, the
raw material from fabric suppliers in Italy helps to drive the success of the Milan fashion industry.
Related supporting industries refer to upstream and downstream industries that facilitate innovation through
exchanging ideas. These can spur innovation depending on the degree of transparency and knowledge
transfer. Related supporting industries in the Diamond model correspond to the suppliers and customers who
can represent either threats or opportunities in the Five Forces model.

Firm Strategy, structure and Rivalry

Firm strategy, structure, and rivalry refer to the basic fact that competition leads to businesses finding ways to
increase production and to the development of technological innovations. The concentration of market power,
degree of competition, and ability of rival firms to enter a nation's market are influential here. This point is
related to the forces of competitors and barriers to new market entrants in the Five Forces model.
Competition in the home market that drives innovation and quality. When there’s lots of competition and lots of rivalry, this keeps
companies on their toes, and so they try to out-compete each other by continually developing more innovative and quality
products and or services. Cultural factors, social attitudes and management style all lead to competitive advantage in
certain industries.
It is important to remember that changes in the industry environment (for example mergers between existing competitors, innovation
leading to new substitutes etc) can change the strength of competitive forces. These changes could affect profitability and hence the
business might need to reconsider its future strategy. If the organization does not respond to these changes, there would be strategic
drift.

Scenario planning
As the external environment is quite complex, it becomes difficult to predict the future.
Organisations can however, develop different scenarios to help them plan and assess threats and opportunities.
It is important that organizations try to make some projections of what might happen as their strategy will need to take
account of this.

A scenario is a detailed and consistent view of how the environment might develop in the future.
They are Particularly useful when two possibilities cannot both occur.

Scenario planning can be done at the marco-environmental level (relating to changes in PESTEL factors) as well as at an industry
level
(relating to changes in Porter’s 5 forces).

For example – there is a possibility that a new government policy could be passed which will make trading conditions more difficult
for a company.

Three scenarios could be prepared. What to do if:

- The new policy is introduced
- The new policy is not introduced
- A compromise law is passed

Note that only one of the above three can happen.

Scenario planning is useful as it forces managers to consider what might happen. Scenarios can then be drawn up for those
situations which would have the most effect on the organisation.

The problems with this approach are:

- The time and cost of preparing scenarios and most of the scenarios will not actually occur.
- There may still be unexpected major environmental influences.

Steps Scenario construction (For Exam Questions)

1. Identify drivers of change

2. Arrange drivers in a viable framework
3. Produce 7-9 mini-scenarios
4. Group mini scenarios into 2-3 comprehensive scenarios
5. Write up the scenarios
6. Identify issues arising
 Strategic capability

Achieving strategic capability

A resource-based view of the firm is based on the view that strategic capability comes
from competitive advantage, which comes in turn from the resources of the firm and the
use of those resources (competences and capabilities).
The organisation should undertake a ‘position audit’ to provide strategic management
with an understanding of the organisation’s strategic capability. Strategic capability
includes resources, competencies and constraints.

The position audit examines the current state of the organisation’s strategic capability.

2 Resources and competences

Resources

An entity uses resources to provide products or services to its customers. A resource is

any asset, process, skill or item of knowledge that is controlled by the entity.

Resources can be grouped into categories:

 Human resources. These are the leaders, managers and other employees of
an entity, and their skills.
 Physical resources. These are the tangible assets of an entity, and include
property, plant and equipment, and also access to sources of raw materials.
 Financial resources. These are the financial assets of the entity, and the
ability to acquire additional finance if this is required.
 Intellectual capital. This includes resources such as patents, trademarks,
brand names and copyrights. It also includes the acquired knowledge and
‘know-how’ of the entity.

Threshold resources and unique resources

A distinction can be made between threshold resources and unique resources.
 Threshold resources are the resources that an entity needs in order to
 participate in the industry and compete in the market. Without threshold
resources, an entity cannot survive in its industry and markets.
 Unique resources are resources controlled by the entity that competitors do
not have and would have difficulty in acquiring. Unique resources can be a
source of competitive advantage.

A unique resource is a resource that competitors would have difficulty in acquiring. It

might be obtained from:
 ownership of scarce raw materials, such as ownership of exploration rights or
mines
 location: for example a hydroelectric power generating company benefits from
being located close to a large waterfall or dam, and a bank might benefit from
a city centre location

 a special privilege, such as the ownership of patents or a unique franchise.

Unique resources are a source of competitive advantage, but they can change over time.
They can lose their uniqueness. For example:
 An investment bank might benefit from employing an exceptionally talented
specialist; however, a rival bank might ‘poach’ him and persuade him to join
them.
 A company might have patent rights that prevent competitors from copying a
unique feature of a product that the company produces. However, competitors
might find an alternative method of making a similar product, without
infringing the patent rights.

Competences

Competences are activities or processes in which an entity uses its resources. They are
created by bringing resources together and using them effectively. Competences are used
to provide products or services, which offer value to customers.

A competence can be defined as an ability to do something well. A business entity must

have competences in key areas in order to compete effectively.

Threshold competencies and core competencies

A distinction can be made between threshold competences and core competences.
 Threshold competences are activities, processes and abilities that provide an
entity with the capability to provide a product or service with features that are
sufficient to meet customer needs (the ability to provide ‘threshold’ product
features).
 Core competences are activities, processes and abilities that give the entity a
capability of meeting the critical success factors for products or services, and
achieving competitive advantage.

Threshold capabilities are the minimum capabilities needed for the organisation to be
able to compete in a given market. For example, threshold competencies are
competencies:
 where the entity has the same level of competence as its competitors, or
 that are easy to imitate.
 To do really well, however, an entity needs to do more than merely to meet thresholds; it
needs capabilities for competitive advantage. Capabilities for competitive advantage
consist of core competences. These are ways in which an entity uses its resources
effectively, better than its competitors, and in ways that competitors cannot imitate or
obtain.

The concept of core competence was first suggested in the 1990s by Hamel and
Pralahad, who defined core competence as: ‘Activities and processes through which
resources are deployed in such a way as to achieve competitive advantage in ways that
others cannot imitate or obtain.’
Sustainable core competences

Core competences might last for a very short time, in which case they do not provide
much competitive advantage.

Competitive advantage is provided by sustainable core competences. These are core

competences that can be sustained over a fairly long period of time – over a period of time
that is long enough to achieve strategic objectives.

Sustainable competences should be durable and/or difficult to imitate.

 Durability. Durability refers to the length of time that a core competence will
continue in existence, or the rate at which a competence depreciates or
becomes obsolete.
 Difficulty to imitate. A sustainable core competence is one that is difficult for
competitors to imitate, or that it will take competitors a long time to imitate or
copy.

Example of core competences

Sustainable core competences come from unique resources and a unique ability to use
resources. The core competences that give firms a competitive advantage vary
enormously. Here are just a few examples:
 Providing a good service to customers. Some entities have a particular
competence in providing good service that other entities find difficult to imitate.
 Embedded operational routines. Some entities use processes and procedures
as part of their normal way of operating, as a result of which they are able to
‘make things happen’. This competence is sometimes described in general
terms as ‘operating efficiency’.
 Management skills. The core competence of an entity might come from the
ability of its management team.
 Knowledge. Knowledge can be a key resource, and a core competence is the
ability to make use of the knowledge and ‘know how’ within the entity, to create
competitive advantage.
It is a useful exercise to think of any company that you would consider successful, and
list the unique resources and core competences that you consider to be the main reasons
why the company has achieved its success. (You should also think about why the
company has been more successful than its main competitors. What makes your chosen
company so much better than other companies in the same industry or the same market?)
3 Capabilities and competitive advantage

Capabilities
 Capabilities are the ability to do something. An entity should have capabilities for gaining
competitive advantage. These come from using and co-ordinating the resources and
competences of the entity to create competitive advantage. Capabilities arise from a
complex combination of resources and core competences, and they are unique to each
business entity.

Each business entity should have capabilities that rivals cannot copy exactly, because the
capabilities are embedded in the entity and its processes and systems.

A resource-based view of the firm is based on the idea that strategic capability comes
from the distinctive capability of the entity to use its resources and competences to
provide a platform for achieving long-term strategic success.

Dynamic capabilities
‘Dynamic capabilities’ is a term used to describe the ability of an entity to create new
capabilities by adapting to its changing business environment, and:
 renewing its resource base: getting rid of resources that have lost value and
acquiring new resources, particularly unique resources
 developing new and improved core competences.
Two definitions of dynamic capabilities are as follows:
 Dynamic capabilities are abilities to create, extend and modify ways in which
an entity operates and uses its resources, and its ability to develop its resource
base, in response to changes in the business environment.
 Dynamic capabilities are the abilities of an entity to adapt and innovate
continually in the face of business and environmental change.

The point has been made in earlier chapters that business entities operate in a
continually-changing environment. Strategic success is achieved by reacting to changes in
the environment more successfully than competitors.

Dynamic capabilities refer to the ability of an entity to respond to environmental change

successfully, and recognise the need for change and the opportunities for innovation,
through new products, processes and services.

4 Position audit techniques

Introduction

There are several techniques that might be used to assess the resources and
competences of an entity.
 Management need to understand how value is created, and how value might
be lost. An assessment of the value that is created or lost by the entity can be
made using value chain analysis or value network analysis (described later
in this chapter).
 Management can prepare a capability profile of the entity. This is an
assessment of the key strategic processes that are needed to provide
consistently superior value to customers. This is an assessment of capabilities
and competitive advantage..
In order to prepare a capability profile, management need a thorough understanding of
the resources that the entity has, the value of those resources, and the competences
that the entity has acquired in using those resources.
 This can be provided by a position audit (resource audit).
A resource audit is an initial assessment of the resources of an entity. It is carried out to
establish what resources there are, which are unique and how efficiently and effectively
they are being used.
A resource audit should identify all the significant resources that are used by an entity.
These will vary according to the nature of the entity. In general, however, a resource audit
should provide data about the following resources.

Strategic capabilities are the capabilities of an organisation that contribute to its long-term survival or competitive
advantage. There are two components of strategic capability: resources and competences. Resources are the assets that
organisations have or can call upon and competences are the ways those assets are used or deployed effectively. A shorthand
way of thinking of this is that resources are ‘what we have’ (nouns) and competences are ‘what we do well’ (verbs).

Strategic capability: adequacy and suitability of the org’s resources (tangible and intangible) and competences.
Resources and competences can be threshold (the minimum needed to compete) or unique/core (which provide a
competitive advantage)

Dynamic capabilities: an org’s ability to change and develop competences to meet the needs of rapidly changing environments.

Threshold capabilities are those needed for an organisation to meet the necessary requirements to compete in a given market
and achieve parity with competitors in that market. Without such capabilities the organisation could not survive over time.
Identifying and managing threshold capabilities raises a signifi can’t challenge because threshold levels of capability will change as
critical success factors change while threshold capabilities are important, they do not of themselves create competitive
advantage or the basis of superior performance.

Distinctive capabilities are required to achieve competitive advantage. These are dependent on an organisation having distinctive
or unique capabilities that are of value to customers and which competitors find difficult to imitate.

Core competences: activities and processes through which resources are used in such a way that they achieve competitive
advantage that others cannot imitate or obtain Unique resources: resources that critically underpin competitive advantage and that
others can’t imitate obtain.

How do strategic capabilities contribute to competitive advantage and sustainable performance?

Competitive advantage: is what makes an entity better than opponents in the long term. A competitive advantage is an
attribute that allows a company to outperform its competitors. Competitive advantages allow a company to achieve superior
margins compared to its competition and generates value for the company and its shareholders.

Bringing these concepts together, a supplier that achieves competitive advantage in a retail market might have done so on the
basis of a distinctive resource such as a powerful brand, but also by distinctive competences such as the building of excellent
relations with
 retailers. The distinctive competences that are likely to be most difficult for competitors to match and form the basis of
competitive advantage will be the multiple and linked ways of providing products, high levels of service and building
relationships.

A competitive advantage must be difficult, if not impossible, to duplicate. If it is easily copied or imitated, it is not considered
a competitive advantage. Examples of Competitive Advantage include
1. Access to natural resources that are restricted to competitors
2. Highly skilled labor
3. A unique geographic location
4. Access to new technology
5. Ability to manufacture products at the lowest cost
6. Brand image recognition
The VRIO framework is a strategic analysis tool designed to help organizations uncover and protect the resources and
capabilities that give them a long-term competitive advantage. The framework should be put into play after the creation of a
vision statement, but before the strategic planning process. Why? The differentiators and advantages you identify will
determine how to approach the marketplace and inform strategic decisions that shape the fate of your company.
VRIO is an acronym for a four-question framework of value, rarity, imitability, andorganization. These four components are
typically approached in the style of a decision tree:

 Value: Do you offer a resource that adds value for customers? Are you able to exploit an opportunity or neutralize
competition with an internal capability?
o No: You are at a competitive disadvantage and need to reassess your resources and capabilities to uncover
value.
o Yes: If value is established, move on in your VRIO analysis to rarity.

 Rarity: Do you control scarce resources or capabilities? Do you own something that’s hard to find yet in demand?
o No: You have value but lack rarity, putting your company in a position of competitive parity. Your resources
are valuable but common, which makes competing in the marketplace more challenging (but not impossible). It’s
recommended to go back one step and reassess.
o Yes: With value and rarity identified, your next hurdle is imitability.

 Imitability: Is it expensive to duplicate your organization’s resource or capability? Is it difficult to find an equivalent
substitute to compete with your offerings?
o No: If your resource has value and rarity, but is affordable or easy to copy, you have a temporary competitive
advantage. It will require considerable effort to stay ahead of competitors and differentiate your services—go back one
step and reassess.
o Yes: You offer something that’s valuable, rare, and hard to imitate—now the focus is on your organization.

 Organization: Does your company have organized management systems, processes, structures, and culture to
capitalize on resources and capabilities?
o No: Without the internal organization and support, it will be difficult to fully realize the potential of your valuable,
rare, and costly-to-imitate resources. Your company will have a unused competitive advantageand will need to reassess
how to attain the needed organization.
o Yes: Your company has achieved the ultimate goal of sustained competitive advantage when it has
successfully identified all four components of the VRIO framework.

A real-life VRIO framework example is Google.

There’s no doubt that Google is one of the most powerful companies in the world, and its success arguably stems from a
sustained competitive advantage in human capital management. If we were to break down Google’s VRIO framework from the
HR perspective, it might look something like this:

 Value: Use human capital management data to hire and retain innovative, productive employees. These employees
consistently create some of the most popular consumer products and services in the world.
 Rarity: No other companies are using data-based employee management so extensively.

 Imitability: Data-based human capital management is both costly and difficult to imitate, at least for the near future.
Companies have to build the software and invest in training their HR staff on the new technology and strategy.

 Organization: Google is organized to capture value from this capability. The IT department has the skills to collect and
maintain the data, while HR and team leaders are trained on how to use the data to hire, promote, manage, and improve
performance of employees.
Having a VRIO framework in place allowed Google to take a completely different approach to human capital management and
make decisions using massive amounts of objective data. For example, Google’s People Operations team set out to identify
which characteristics make a great manager. The data used to determine this included surveys, performance evaluations, and
great-manager nominations. Google also conducted double-blind interviews with the company's highest- and lowest-rated
managers. By determining what qualifies as a great manager, Google strengthens its internal team and the foundation of its
sustained competitive advantage.

If competitive advantage is to be achieved, resources and competences much has 4 qualities (VRIO)
1. Value: Strategic capabilities are valuable when they create a product or a service that is of value to customers and if,
and only if, they generate higher revenues or lower costs or both.
2. Rarity: Rare capabilities, on the other hand, are those possessed uniquely by one organisation or by a few others. It
can be dangerous to assume that resources and capabilities that are rare will remain so. So it may be necessary to
consider other bases of sustainability.
3. Imitability: inimitable capabilities – those that competitors find difficult and costly to imitate or obtain or substitute;
mainly linked to competences rather than resources ( so activities and processes which satisfy customer priorities and
are difficult to copy)
4. Organizational support: the organisation must also be suitably organised to support these capabilities including
appropriate organisational processes and systems. This implies that to fully take advantage of the capabilities an organisation’s
structure and formal and informal management control systems need to support and facilitate their exploitation. In brief,
even though an organisation has valuable, rare and inimitable capabilities some of its potential competitive advantage
may not be realised if it lacks the organisational arrangements to fully exploit these.

Knowledge as a resource and a competence

Corporate knowledge and strategic capability

Corporate knowledge or organisational knowledge is the knowledge and ‘know- how’ that
is acquired by the entity as a whole. It is created through the interaction between
technologies, techniques and people. Within organisations, knowledge comes from a
combination of:
 collaboration between people, who share their knowledge and create new
knowledge together
 technology, which makes it possible to store and communicate knowledge
 information systems that make use of the technology systems, and
 information analysis techniques.
Knowledge gives a company a competitive advantage. Another important characteristic of
corporate knowledge is therefore that it cannot be easily replicated by a competitor. It is
something unique to the company that owns it.

Another way of making this point is to say that the premium value of knowledge comes
from the fact that it cannot be digitised, codified and easily distributed or easily acquired.

A capability in knowledge management comes from a combination of unique

resources and core competences:
 experience in an industry or market, and acquiring knowledge through
experience
  the knowledge that employees have or acquire, for example through training
 the management of people, and success in encouraging creativity and new ideas
 the management of IS/IT systems.

Organisational learning
Organisational learning is a feature of knowledge management which aims to exploit
existing knowledge by generating new knowledge which in turn can itself be exploited.
Organisational learning involves management promoting a culture that values
experimentation, conflicting views and intuition. This is necessary in order to experiment
with ideas that are not necessarily guaranteed to succeed within a culture that embraces
the freedom to make mistakes. The idea is that ultimately some of those ideas will be
highly successful, even if the others fail.

Knowledge management systems

Knowledge management systems (KMS) enable knowledge to be managed in a way that
makes it easily available to those that need it. Examples of KMS include:
 office automation systems such as voice messaging and word processing
 an organisation’s intranet
 data warehouses and data mining software
 expert systems that capture human expertise such as medical diagnostics and
preliminary loan screening systems.

Human resources
People are a fundamental component of strategic capability. Therefore careful human
resource management should be implemented to ensure the workforce maximises the
strategic capability of an organisation. This might involve:
 Recruitment and selection practices emphasising the need for innovation,
strategic thinking and leadership
 Training and development targeted at strategically aligned objectives
 Embedding strategic thinking in the culture of an organisation.

As accountants, you will need to understand that knowledge – its management, optimisation and valuation – requires
focus if it is to be the basis of market success or failure. It is already an area that is being measured in terms of its
contribution to the existence of an organisation, and it is therefore a critical success factor, if not already an unrecognised core
competence. Talent and knowledge are an organisation’s capabilities and abilities.

Knowledge therefore contributes to the strategic capability of an

organization. What is knowledge?

You must be familiar with the distinction drawn between data and information. Data is observations of facts outside of any
context,
the information is data within a meaningful context. One way of understanding what is meant by knowledge is to think of it
as being ‘information-plus’ or information combined with experience, context, interpretation, reflection and is highly contextual. It is
a high- value form of information that is ready for application to decisions and actions within organisations.

Knowledge management
Knowledge management is the attempt to improve/maximise the use of knowledge which exists in an organisation. More
specifically it aims to stimulate its creation and encourage its capture, sorting, sifting, access, linking, storage and distribution. In
short, it addresses itself to the processes identified above. Traditionally economics textbooks emphasise the quantity, quality
and combination of ‘factors’ of production (land, labour, capital and enterprise) in competitive advantage. Nowadays, however, it
is argued that the creation and exploitation of ‘difficult-to-replicate’ assets such as knowledge is crucial if competitive advantage is
to be gained and retained.
THE ORGANISATION, ITS COMPETITIVE ADVANTAGE, AND KNOWLEDGE
The basis of competition is shifting from having a unique raw material or production system in manufacturing, to differentiation
though
the building of knowledge. ‘Having knowledge can be regarded as even more important than possessing the other means of production
– land, buildings, labour, and capital – because all the other sources are readily available in an advanced global society, while
the right leading-edge knowledge is distinctly hard to obtain.’

Companies have already moved from being labour intensive to process intensive, to carry out tasks most efficiently,
effectively, economically and productively as possible while all the time introducing new techniques or elements to the process,
product or service.

The core issue when considering knowledge management is how to get people to share their knowledge.
The easiest methods are through traditional rewards, such as pay, incentives, benefits, stocks, profits, and commissions or
alternatively, through learning opportunitie

The role of information and communication technologies (ICT)

An ICT infrastructure has a contribution to make in the following areas:

 Capturing knowledge.
 Defining, storing, categorising, indexing, and linking digital objects that correspond to knowledge units.
 Searching for ('pulling') and subscribing to ('pushing') relevant content.
 Presenting content with sufficient flexibility to render it meaningful and applicable across multiple contexts of use.

In terms of technologies the following are important:

 Intranet: to support access and exchange both within an organisation and between it and close allies such as
customers and suppliers.
 Data warehousing/repositories: the storage and making available knowledge wrapped in various degrees of context.
 Decision support systems: incorporating relevant knowledge.
 Group-ware to support collaboration: facilitating the sharing of ideas in a free-flowing manner including discussion
between participants.
 Desktop video-conferencing: for person-to-person contact important for the exchange of tacit knowledge.
 E-mail: as for desktop video-conferencing.
Page 74
 Understanding and diagnosing strategic capability
Benchmarking is used as a means of understanding how an organisation compares with others– typically competitors.
Many benchmarking exercises focus on outputs such as standards of product or service, but others do attempt to take
account of organisational capabilities.

The value chain and value system

Definition of value

Value relates to the benefit that a customer obtains from a product or service. Value is
provided by the attributes of the product or service. Customers are willing to pay money to
obtain goods or services because of the benefits they receive. The price they are willing to
pay puts a value on those benefits.

Business entities create added value when they make goods and provide services. For
example, if a business entity buys a quantity of leather for $1,000 and converts this into
leather belts, which it sells for $10,000, it has created value of $9,000.

In a competitive market, the most successful business entities are those that are most
successful in creating value. Porter has suggested that:
 if a firm pursues a cost leadership strategy, its aim is to create the same value
as its competitors, but at a lower cost
 if a firm pursues a differentiation strategy, it aims to create more value than its
competitors.

The only reason why a customer should be willing to pay a higher price than the lowest
price in the market is that he sees additional value in the higher-priced product, and is
willing to pay more to obtain the value.
 This extra value might be real or perceived. For example a customer might be
willing to pay more for a product with a well-known brand name, assuming that
a similar non-branded product is lower in quality. This difference in quality
might be imagined rather than real; even so, the customer will pay the extra
amount to get the branded product.
 The extra value might relate to the quality or design features of the product.
 However, other factors in the marketing mix might persuade a customer that a
product offers more value. For example, a customer might pay more to buy
one product than a lower-priced alternative because it is available immediately
(convenience) or because the customer has been attracted to the product by
advertising.

The concept of the value chain

A framework for analysing how value can be added to a product or service has been
provided by Porter.

Porter (‘Competitive Strategy’) grouped the activities of a business entity into a value
chain. A value chain is a series of activities, each of which adds value. The total value
added by the entity is the sum of the value created by each stage along the chain. This
total value added is referred to as margin and represents the excess that the customer is
prepared to pay above the underlying cost to the company of obtaining resources and
providing value activities.

Johnson and Scholes have defined the value chain as: ‘the activities within and around an
organisation which together create a product or service.’

Strategic success depends on the way that an entity as a whole performs, but
competitive advantage, which is a key to strategic success, comes from each of the
individual and specific activities that make up the value chain.

Within an entity:
 there is a primary value chain comprising ‘primary activities’, and
 there are support activities (also called secondary value chain activities).
Linkages describe the relationships between activities.

Primary value chain

Porter identified the chain of activities in the primary value chain as follows:

This value chain applies to manufacturing and retailing companies, but can be adapted for
companies that sell services rather than products.

Most value is usually created in the primary value chain.

 Inbound logistics. These are the activities concerned with receiving and
handling purchased materials and components, and storing them until
needed. In a manufacturing company, inbound logistics therefore include
activities such as materials handling, transport from suppliers and inventory
management and inventory control.
 Operations. These are the activities concerned with converting the purchased
materials into an item that customers will buy. In a manufacturing company,
operations might include machining, assembly, packing, testing and equipment
maintenance.
 Outbound logistics. These are activities concerned with the storage of
finished goods before sale, and the distribution and delivery of goods (or
services) to the
 customers. For services, outbound logistics relate to the delivery of a service at the
customer’s own premises.
 Marketing and sales. These are the activities that inform customers about the
product or service and persuade them to make a purchase. Includes activities
such as advertising and promotion.
 Service. These are all the activities that occur after the point of sale, such as
installation, warranties, repairs and maintenance, providing training to the
employees of customers and after-sales service.

The nature of the activities in the value chain varies from one industry to another, and
there are also differences between the value chain of manufacturers, retailers and other
service industries. However, the concept of the primary value chain is valid for all types of
business entity.

Secondary value chain activities: support activities

In addition to the primary value chain activities, there are also secondary activities or
support activities. Porter identified these as:
 Procurement. These are activities concerned with buying the resources for
the entity – materials, plant, equipment and other assets.
 Technology development. These are activities related to any development in
the technological systems of the entity, such as product design (research and
development) and IT systems. Technology development is an important
activity for innovation. ‘Technology’ also includes acquired knowledge: in this
sense all activities have some technology content, even if this is just acquired
knowledge.
 Human resources management. These are the activities concerned with
recruiting, training, developing and rewarding people in the organisation.
 Corporate infrastructure. This relates to the organisation structure and its
management systems, including planning and finance management, quality
management and information systems management.

Support activities are often seen as necessary ‘overheads’ to support the primary value
chain, but value can also be created by support activities. For example:
 Procurement can add value by identifying a cheaper source of materials or
equipment
 Technology development can add value to operations with the introduction of a
new IT system
 Human resources management can add value by improving the skills of
employees through training.
 Corporate infrastructure can help to create value by providing a better
management information system that helps management to make better
decisions.

Adding value

Strategic management should look for ways of adding value because this improves
competitiveness (creates competitive advantage).
 Management should look for ways of adding more value at each stage in the
primary value chain.
 Similarly, management should consider ways in which support activities
 can add more value.
Finding ways of adding value is a key aspect of strategic management. Answers need to
be provided to a few basic questions:
 Who is the customer?
 What features of the product or service do they value?
 How do we provide value to the customer in the products or services we
provide?
 How can we add to the value that the customer receives?
 How can we add value more successfully than our competitors? Do we have
some core competencies that we can use to give us a competitive
advantage?

Methods of adding value

There are different ways of adding value.
 One way of adding value is to alter a product design, and include features
that might meet the needs of a particular type of customer better than
products that are currently in the market.
A product might be designed with added features.
Market segmentation is successful when a group of customers value particular
product characteristics, and are willing to pay more for a product that provides them.
 Value can be added by making it easier for the customer to buy a product, for
example by providing a website where customers can make purchases.
Bookstores can add value to the books they sell by providing sales outlets at
places where customers often want to buy books, such as airport terminals.
 Value can be added by promoting a brand name. Successful branding might
give customers a sense of buying products or services with a better quality.
 Value can be added by delivering a service or product more quickly. For
example, a private hospital might add value by offering treatment to patients
more quickly than other hospitals in the region.
 Value can also come from providing a reliable service, so that customers know
that they will receive the service on time, at the promised time, to a good
standard of performance.

New product design (innovation) is also concerned with creating a product that provides
an appropriate amount of value to customers.

Value creation and strategic management

By adding value more successfully, a firm will improve its profitability, by reducing costs or
improving sales. Some of the extra benefit might be passed on to the customer, in the
form of a better-quality product or service or a lower selling price. If so, the business entity
shares the benefits of added value with the customers, and gains additional competitive
advantage.

Added value does not have to be given immediately to customers (in the form of lower
prices) or shareholders (in the form of higher dividends). The benefits can be re-invested
to create more competitive advantage in the future.

There is a link between:

 corporate strategy, which should aim to add value for the customer
  financial strategy, which should aim to add value for the shareholders and
 investment strategy, which should aim to ensure that the entity will continue
to add more value in the future.

In your examination, the value chain model can be used to make a strategic
assessment of performance. Each part of the primary value chain and each of
the secondary value chain activities should be analysed. For each part of the
value chain, providing answers to the following questions can assess
performance:
 How is value added by this part of the value chain?
 Has the entity been successful in adding value in this part of the value chain?
 Has the entity been more successful than its competitors in adding value in
this part of the value chain?
 Has there been a failure to add value successfully?
 Does the entity have the core competencies in this part of the value chain to
add value successfully? (If not, a decision might be taken to out-source the
activities.)

The value chain describes the categories of activities within an organisation which, together, create a product or service.
Most organisations are also part of a wider value system, the set of inter-organisational links and relationships that are
necessary to create a product or service.

Both are useful in understanding the strategic position of an organisation and where valuable strategic capabilities reside.

P orter’s Value chain : assess strategic capability ( a summary of what the org does and how its activities/processes add
value to the end customer)
If organisations are to achieve competitive advantage by delivering value to customers, managers need to understand which
activities their organisation undertakes that are especially important in creating that value and which are not. This can then
be used to model the value generation of an organisation. The important point is that the concept of the value chain
invites the strategist to think of an organisation in terms of sets of activities.

M. Porter introduced the generic value chain model in 1985. Value chain represents all the internal activities a firm
engages in to produce goods and services. VC is formed of primary activities that add value to the final product directly
and support activities that add value indirectly.

Primary activities: are directly concerned with the creation or delivery of a product or
service. For example, for a manufacturing business:
 Inbound logistics are activities concerned with receiving, storing and distributing inputs to the product or service
including materials handling, stock control, transport, etc.
 Operations transform these inputs into the fi nal product or service: machining, packaging, assembly, testing, etc.

 Outbound logistics collect, store and distribute the product or service to customers; for example, warehousing,
materials handling, distribution, etc.

 Marketing and sales provide the means whereby consumers or users are made aware of the product or service and are
able to purchase it. This includes sales administration, advertising and selling.

 Service includes those activities that enhance or maintain the value of a product or service, such as installation, repair,
training and spares.

Support activities: assistance to primary activities (provide support in terms of purchased inputs, human resources, technology
and infrastructure) can play an important role in respect of corporate social responsibility and sustainability!

Each of these groups of primary activities is linked to support activities which help to improve the effectiveness or efficiency of
primary activities:

Procurement. Processes that occur in many parts of the organisation for acquiring the various resource inputs to the primary
activities. These can be vitally important in achieving scale advantages. So, for example, many large consumer goods
companies with multiple businesses none the less procure advertising centrally.

 Technology development. All value activities have a ‘technology’, even if it is just know-how.
Technologies may be concerned directly with a product (e.g. R&D, product design) or with processes (e.g. process
development) or with a particular resource (e.g. raw materials improvements).

 Human resource management. This transcends all primary activities and is concerned with recruiting, managing,
training, developing and rewarding people within the organisation.

 Infrastructure. The formal systems of planning, finance, quality control, information management and the structure of
an organisation.

Although, primary activities add value directly to the production process, they are not necessarily more important than
support activities. Nowadays, competitive advantage mainly derives from technological improvements or innovations in business
models or processes. Therefore, such support activities as ‘information systems’, ‘R&D’ or ‘general management’ are usually the most
important source of differentiation advantage. On the other hand, primary activities are usually the source of cost advantage,
where costs can be easily identified for each activity and properly managed.

The value chain can be used to understand the strategic position of an organisation and analyse strategic capabilities in three
ways:

- As a generic description of activities it can help managers understand if there is a cluster of activities providing benefit to
customers located within particular areas of the value chain. Perhaps a business is especially good at outbound logistics
linked to its marketing and sales operation and supported by its technology development. It might be less good in
terms of its operations and its inbound logistics.

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 - In analyzing the competitive position of the organisation using the VRIO criteria as follows:
V Which value -creating activities are especially signifi can’t for an organisation in meeting customer needs and could they b
usefully developed further?
R To what extent and how does an organisation have bases of value creation that are rare? Or conversely are
elements of its value chain common to its competitors?
I What aspects of value creation are difficult for others to imitate, perhaps because they are embedded in the activ
systems of the organisation?
O What parts of the value chain support and facilitate value creation activities in other sections of the value chain? F
example, firm infrastructure support activities including particular formal and informal management control systems can
necessary to fully exploit value creation in the primary activities.

- To analyse the cost and value of activities of an organisation. This can be done by following these steps:

Value network

6 Value network

Difference between a value chain and a value network

There is a value chain within every business entity.

There is also a supply chain from the producers of raw materials and
equipment through to the entities that sell the end consumer product to
customers.

For example, food products might go from the original food producer to
a food processor (who makes the processed food item) to a retailer.
Here, there are three firms in the supply chain from the original food
source to the end consumer. Each firm in the supply chain has its own
value chain.

A value network, also called a value system, is the sum of the value
chains in all the firms in a supply chain.

The value that the end-consumers customers pay for when they buy
goods or services comes from the value created by the entire value
network.

Definition
A value network can be defined as ‘any web of relationships that
generates tangible and intangible value through complex, dynamic
exchanges between two or more individuals, groups or organisations’.

Through networks, a company with a small number of employees can

actually have a value network with a large number of different
suppliers and customers.
 Elements in a value network

For many business entities, the value network is more complex than a
chain of suppliers, from raw materials to end product. Other entities
are also included in the value network. These can be categorised as:
 Intermediaries. These are entities that provide outsourced
services (such as out- sourced book-keeping or outsourced
logistics management) and support services (such as public
relations advisers).
 Complementors. These are entities that provide additional
and complementary products or services.

The elements in a value network are shown in the diagram below.

Supplier of raw materials

Supplier of components

Intermediaries: Complementors:
Providers of out- Providers of
sourced services and The entity additional,
other support complementary
services products or services

The entity’s customers

The end consumers

Example

A company produces the consoles (handsets) and operating system

software for computer games.

 It buys raw materials and components from suppliers for the

assembly of the consoles.
 Intermediaries: It sells its products globally, and in some
countries it outsources the sales function to other
companies. It also outsources some of the software
production to specialist software companies.
 Complementors: The success of the company’s product
 depends largely on the availability of computer games that
customers can play on the console. Computer games are
written and supplied by independent companies, including
subsidiaries of film studios.
 The entity’s customers. The consoles are supplied to retail
organisations in most countries of the world.

All these elements make up a single value network.

The strategic significance of value networks

The concept of the value network or value system has an important

implication for each firm in the supply chain/value network. Value can
be created (and lost) in any part of the value network. To achieve
competitive advantage, it is often necessary to work with other entities
in the value network in order to create extra value.

The concept of a value network is particularly important for value

systems that do not consist of a simple chain of suppliers from raw
materials through to finished

products. It is very useful, for example, in many service industries

where securing and retaining customers or suppliers depends on the
activities of other entities.

An entity should try to improve the efficiency and effectiveness of its

own activities in creating value within its own value chain.

However, it should also consider the entire value network, and think
about how value might be added across the network, not just within its
own internal value chain. A value network must operate with the
efficiency and effectiveness of a self- contained individual entity. To do
this, it is necessary to manage relationships with other entities in the
network.

Example

Mobile telephones can deliver a variety of services to users, such as

voice telephony, music, entertainment, picture transmission,
photography and data transmission. Providing all this value to users
requires collaboration between many different companies:
manufacturers of mobile handsets, operators of mobile networks,
content providers, computer manufacturers, and so on.
Collaboration
Collaboration between business entities and their key suppliers, for
example in developing new materials or improving delivery systems,
can help to add value across the supply chain, to the benefit of both
entities.

The concept of the value network has been introduced by one writer
as follows: ‘Re- inventing supply chains…From communication to
collaboration.’ In many industries and markets business entities need
to work together to find strategic solutions. It is not sufficient simply to
exchange information about what they are planning to do.

A single organisation rarely undertakes in-house all of the value activities from design through to the
delivery of the final product or service to the final consumer. There is usually specialization of roles
soany one organisation is part of a wider value system of different interacting organisations.

Value networks recognise that few companies stand alone and that what is ultimately supplied to and paid
for by customers depends on activities carried on by many suppliers, distributors and, indeed, logistical
companies. Ultimately, customer satisfaction and value added depend on all parties working well
together.

In addition to managing its own value chain, organizations can get competitive advantage by managing
the linkages/relationships with the value chain of its suppliers and customers.

If relationships in the value network care carefully managed, they can promote innovation and
creation of knowledge between organisations.

SWOT Analysis
SWOT provides a general summary of the Strengths and Weaknesses explored in an analysis of
strategic capabilities and the Opportunities and Threats explored in an analysis of the
environment.

This analysis can also be useful as a basis for generating strategic options and assess future courses
of action.

The aim is to identify the extent to which strengths and weaknesses are relevant to, or capable of
dealing with, the changes taking place in the business environment

Internal: strengths and weaknesses; resources and capabilities

External: opportunities and threats; environment, industry structure

Strengths and Weaknesses
Strengths and weaknesses are the factors of the firm’s internal environment. When looking for strengths, ask what
do you do better or have more valuable than your competitors have? In case of the weaknesses, ask what
could you improve and at least catch up with your competitors?